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The Endowment Diary

The Endowment Diary

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The Endowment Mis-selling Debacle - one of the UK's worst financial scandals

Friday, February 13, 2009

Scottish Widows Cut Bonuses

Scottish Widows Cut Bonuses

Scottish Widows have cut the bonus rates on their with-profits (such an ironic name for a product that does not actually produce a profit for the hapless policy holder) policies. Scottish Widows claim that the £14BN with-profits fund fell by 17.5% in 2008.

The majority of the 775,000 policies will therefore pay out less than they did last year.

The concept of "with-profits", as told to hapless investors by the life assurance companies, was that the life assurance comapnies would smooth the bonuses during the life of the policy. The fact that companies are having to cut bonuses indicates that this smoothing clearly has not taken place, and the bonus payments in earlier years were too high.

Why would the companies pay out bonuses that were too high in earlier years?

Simple, so that they could attract more investors by showing that their policies were high profit yielding products (some cynics might argue that these policies were a scam).